Breakfast Bites - Higher for Longer is back!

Rise and shine everyone.

The big news is still the FOMC minutes from yesterday, which seemed to push the market markedly lower after its release. The key takeaway - rates could remain higher for longer, and hikes may not be over.

The probability of easing in March 2024 went from 86.7% a week ago to 68.28%, according to the Fed Fund Futures. We think the market got ahead of itself in terms of rate cuts and pricing in over 200 bps of cuts for 2024 was over the top, and likely signals a stronger possibility of a recession from these forecasters.

I still think that the Fed’s first cut is coming in June - July. I doubt that the data will warrant a cut before that. Core inflation should be firmly below 3% by that time for a few months, and the Fed will be in a position to start policy normalization.

One interesting point to note is that “several” participants anticipate slowing the pace of balance sheet runoff before stopping that runoff. This could open the door to further discussion on balance sheet management in the meetings ahead. There’s been a lot of chatter surrounding the short term funding market, and this could be a possible reason for raising the balance sheet discussion going forward.

With this news, however, the markets flipped on its head and closed lower - SPX -0.8% and NDX -1.06%. “This is the third time in history that the Nasdaq has started the year with back-to-back -1% declines. The other two years were 1980 & 2005”. (GS)

In other news, shipping rates continue to increase and oil gets a bid from continuing tensions in the Red Sea and the Middle East.

US Equity Futures were trading higher to start day and have now flipped red. Yields are now higher for a third day with the US Dollar holding stead. Gold is higher, alongside Bitcoin. While oil has spiked trading above $73.

Asia and Australia

• Asian markets mixed. China and Hong Kong continue lower, while the Nikkei closed higher in its first trading day of the year. India is higher while the Kopi and Australia are lower.

• China’s Dec Caixin PMI for Services saw the fastest pace of increase in 5 months and the 12th month of expansion coming in at 52.9, up from 51.5. The Caixin covers smaller firms that then official PMI, which is also in expansionary territory

• China has front-loaded its oil import quotas for 2024. The government has allocated a quota of 179.01 million tons — or 3.59 million barrels a day for the year ahead, which is only slightly below that of 2023 at 183.69 million tons. While China’s state-owned refiners are not subject to import quotas, this front-loading should help smaller private refiners budget for the rest of the year and jump-start production and capex expansion plans.

Europe, the Middle East, and Africa

• European markets are softer with France leading and the UK lagging. Gilts are seeing a steepening.

• Early data on Dec CPI from German regions show an increase across the board on a month-on-month basis, leading to higher Y/Y numbers as well. Brandenburg saw CPI increase to 4.5% Y/Y from 4.1% and Bavaria saw an increase to 3.4% Y/Y from 2.8%. This does not bode well for inflation for the EA overall, which we should receive tomorrow. However, base effects were strong in the past few months and now the comps get tougher, so the ECB did have a view that inflation could see a spike. Official numbers for Germany will be released at 8 am ET.

• France Dec CPI numbers also came in higher at 0.1% M/M from -0.2% and 3.7% Y/Y from 3.5%. This uptick in inflation is mainly due to higher energy prices (5.6% vs 3.1% in November) and services (3.1% vs 2.8%).

The Americas

• Top House GOP lawmakers push Senate and the Biden administration to insert restrictive border policies into any government funding bills heading into the Jan 19th and Feb 2nd deadlines.

• The Corporate Bond market has been quite active in just the first week of the year. ~$60B in global paper has been issued, of which ~$37B is US Investment Grade supply. The US IG space remains a lucrative space with more companies refinancing at higher rates this year as they hit a corporate maturity wall.

Chart of the Day:

According to GS, non-profitable tech companies saw a lot of shorting in Aug through Nov, and much of those were covered in Dec. While that is changing somewhat, they note that they are still not seeing elevated levels of shorting just yet.

Calendar

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)